With the uncertainty of the markets these days and the ongoing low interest rate environment, investors’ attraction to bonds is easy to understand; so too is the appeal of income derived from markets outside the domestic arena.
However, on a total returns basis UK equity income funds are outstripping the average returns of all the bond sectors while still offering competitive yields. In addition, the best UK performers are outpacing their global, European, US and Asian income competitors while offering higher income distributions.
Despite this fund flows still show increased demand for bond funds, particularly those in the IMA Strategic sector, and groups continue to promote the advantages of foreign income over domestic-oriented funds.
Equity yields v bonds
Bond fund yields are soaring above 6% and captivating a lot of investor attention, but yields on equity income funds aren’t too far behind.
Based on FE Analytics’ current factsheet information, yields in the Strategic Bond sector show ten funds yielding above 6%. Yields among equity income funds vary from 2.67% up to 7.80%, but the sector features eight above 6%.
It can be argued that many of these ‘yields’ are different, both in the calculation and reporting, and do not actually cover what is truly distributed to investors. It can also be argued that those with the highest yields could potentially be involved in value traps. Still, many of the names within the UK Equity Income sector featuring the highest yields are well-known funds, including Newton Higher Income, Schroder Income Maximiser and Fidelity Enhanced Income.
Compared to the other bond sectors, UK equity income funds appear to be yielding higher than most portfolios in the UK Corporate Bond category while in general they lag the High Yield sector. In the latter there are 17 different portfolios on yields greater than 6%.
On a yield basis, the UK funds are also far outdoing their foreign equity income competitors. Not a single fund in the Global sector has a yield above 5.3%, with most of the income portfolios yielding closer to 4.5%. Within the Europe ex UK sector, Newton European Higher Income has a yield of 6.02% but the rest of the income-oriented funds yield less than 5%.
There are just a few North American funds with an income strategy and none are above 3%. Asia looks stronger with Schroder’s Asian Income Maximiser yielding almost 7% while only two others are above 5%.
Performance stronger in UK
Despite the lacklustre appeal of the UK economy – but inline with market commentators noting UK companies look healthy – returns from equity income portfolios have been strong over the past year. This is both relative to all the bond sectors as well as the top-performing foreign income portfolios.
The average return in the Equity Income sector over the 12 months to 27 July is 15.35% compared to the average Strategic Bond return of 6.74%. High Yield funds are performing slightly more strongly but still lag equities with a total return over 12 months of 9.3%.
On a total return performance basis it is more difficult to compare the average gain from foreign income portfolios due to their listing in mainstream sectors. The best performing global income fund has returned 20.79%, while the top European income fund has gained 18.57%. The top gain among North American income portfolios is JPM US Equity Income with 17.53%, while in Asia Newton Asian Income comes out ahead with 24.09%. All of this compares to the highest return in the UK income arena of 32.43% by Unicorn UK income.
It could be argued the strong return of the portfolio is due to its small cap bias but the second best performer over 12 months, Henderson UK Equity Income, still beats the average total return of all the bond portfolios and the top foreign equity returns, at 28.59%.
And our conclusion? Maybe investors should be encouraged to stick with UK equity income as an all-weather solution to the perennial income need. These funds have been around for some 25 years for a very good reason…
